Understanding insurance costs

The rates for all permanent insurance products, including whole life, universal life and term-100 have risen by an average of more than 15% over the past year alone.

“For some categories, premiums have gone up by as much as 30% to 55%,” says, Raymond Yates, senior partner with Save Right Financial Inc., a Mississauga, Ont.-based insurance managing general agency.

In addition to higher premiums, clients now have less choice among permanent products. Late last year, Standard Life Assurance Co. of Canada ceased selling all individual life insurance products; and in June, RBC Life Insurance Co. suspended sales of its permanent insurance products.

Permanent insurance rates have risen, saysRULS_aIwE_rOecntc_Aed_GCeMYllKe_rF,2.pprdefside1nt2o0f1 L. I. Geller Insurance Agencies Ltd. in Campbellville, Ont., because insurance companies make pricing assumptions on two main factors: interest rates and mortality rates. Over the past 10 years, he says, the long-term interest rate assumption has been in the range of 5%-7%. During the same period, long-term bond yields have fallen to less than 4% from slightly more than 6%. The decrease in yields has prompted insurance companies to increase rates for permanent policies.

On the positive front, Geller says, “Absolute mortality is not increasing.” So, the claims experience of insurance companies is not expected to be a further cause of an increase in rates.

While lower interest rates are the underlying reason for higher permanent insurance costs, insurance companies also are preparing for the implementation of proposed changes to international insurance accounting standards and Canadian regulatory capital requirements, which will require insurers to increase the amount of capital they set aside to support permanent life insurance products. These changes will affect existing policies, so premiums for new permanent life policies most likely will r9i-s1e0to o10ff: s4e8tAthMose higher costs.

Although there is a bias toward higher rates, there is no consensus on whether permanent insurance rates will continue to rise. A number of variables will factor into this decision, including the length of time that interest rates remain low, the mortality experience of insurance companies and competitive pressures. The impact of regulatory pressures cannot be offset.

Says Geller: “Even if rates were to come down in a more favourable interest rate environment, they will certainly not come down by as much as they have gone up.”

So, in the face of rising insurance costs, fulfilling your clients’ needs for permanent insurance has become considerably challenging. The price of a given amount of coverage has increased. As a result, your clients might have to re-evaluate their decision to buy permanent insurance, opt for reduced coverage or choose less expensive term insurance – or a combination of permanent and term insurance.

John McVittie, president of APK Wealth Retention Inc. in Toronto, does not anticipate that a 10%-20% increase in costs would deter clients from acquiring permanent insurance. “Cost is not a selling feature,” he says. “If a client bought a whole life policy today and held it for the long term, returns would compound [in] the same way as with any other investment.”

Geller agrees: “Rates should not matter to the client.”

Geller discusses insurance with his clients based on two key factors: the amount of insurance they need and the length of time that the need for insurance will be. This needs analysis takes into account several factors, including marital status, children, support for parents and lifestyle. Geller also asks his clients about their cash flow and discusses all available options prior to them making the decision to buy insurance or not.

Affordability also is factor that is built into Yates’ needs analysis and, he says, is especially relevant to clients with limited cash flow. Permanent insurance typically gives clients the psychological comfort that they are insured for life at an early age and takes away the worry about having to pay higher premiums as they get older. Effectively, Yates adds, clients get a guaranteed policy with premiums that do not change and benefits that are defined.

When affordability comes into the picture, Yates typically recommends term-10 insurance or a mix of term and permanent insurance in order to meet clients’ needs.

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